On the back of a continuing fall in commodity prices, the macro outlook continues to split into three camps. In order of promising outlook these are, first the US, second the consuming / creditor nations such as the northern half of the EU; and thirdly the producer / debtor nations including most emerging markets.
The US is one of the largest producers of oil, coal, steel and gas but also one of the largest consumers of commodities. Its continuing ability to trade with itself has increased employment further, with Friday’s jobs report of 215,000 jobs added complemented by an increase in worker hours from 34.5 to 34.6 per week, with the extra six minutes per worker equal to another 300,000 jobs but also an indicator of improving productivity. Improving economic conditions have increased the probability of a Fed Funds rate rise perhaps as early as next month. These two conditions have led to a huge influx of investor money into the US, as the continuing bull market in equities testifies. The strengthening dollar is improving profits for US exporters, increasing funds available for investment or for distribution to shareholders.
For consuming / creditor nations, economic conditions are relatively benign. Lower commodity prices help, despite the strengthening dollar, while currency variations (sterling relatively strong, the Euro and Yen relatively weak) seem to be balancing out the benefits and costs respectively to exporters and importers. For these nations, the arbitrage between sources of supply, whether geographical or by type, are driving decisions on trade. For instance, cheap natural gas is driving down demand for coal for electricity generation, with environmental benefits. This middle band of countries has some time in hand to adjust loose monetary policy while dealing with national deficits. Governments will be able to take advantage of macro conditions to be more lenient on fiscal policy, loosening the reins of austerity and presumably harvesting votes in the process.
The producer / debtor nations on the other hand are suffering from low prices, which are pegging back social, welfare and infrastructure spending and increasing government and State Owned Enterprise indebtedness. Attempts to devalue currencies to support exporters only increase the cost of borrowing in dollars on the international money markets. After years of encouragement from the likes of the IMF to borrow money and build infrastructure and productive capacity, these countries are now left with unprofitable industries unable to service dollar-denominated debt. The worst case is perhaps Venezuela, which relies on oil exports for 96% of government revenues. But the Middle East, Russia, Brazil, and a number of the Asian tiger economies are struggling as a consequence of lower commodity prices and weakening currencies.
The raft of economic data coming out of China this week may only emphasise producer /debtor nations’ dependence on China as a key customer and could increase concern regarding their ability to service debt. It seems like the pendulum of economic growth has swung away from the emerging markets and back to the OECD. The implications for shipping demand are unclear, but previous experience tells us that weak Asian economies and weak emerging markets are bad for trade growth. Fingers crossed that the commodity price cycle is near to bottoming out.